Having a well drafted franchise agreement can prove invaluable to franchisors. A recent Pennsylvania federal district court decision in Tantopia Franchising Company, LLC v. West Coast Tans of PA, LLC et al. is a perfect reminder why non-compete provisions are important.
In 2002, West Coast Tans of PA entered a franchise agreement to run a Philadelphia tanning salon with Tantopia, a franchisor of tanning salons. The franchise agreement contained a non-compete provision prohibiting West Coast from directly or indirectly operating a competing business in its protected territory or within ten miles of any of Tantopia’s other franchises for two years after termination of the agreement. West Coast’s owners signed a personal guarantee acknowledging that they would also be bound by the non-compete. The franchise agreement terminated when West Coast closed the Philadelphia salon in January 2012. TMA International LLC, a company purportedly owned and operated by Connors, obtained the former Philadelphia salon’s tanning equipment at a sheriff’s sale and entered into a store lease with a landlord to open a new independent tanning salon in Southampton within 3/10 of a mile of a Tantopia franchised location. Tantopia brought suit against West Coast, its owners, TMA and Connors claiming they were violating the non-compete provision in the original franchise agreement and to prevent them from opening the Southampton salon.
West Coast Tan’s owners asserted they were not operating the Southampton salon, but merely advising Connors, and that the non-compete clause was overbroad because it sought to enjoin West Coast Tan and its owners from providing assistance to TMA in the organization of its business. But the court found West Coast Tan’s owners had negotiated the store lease, a note, and other contracts to open the Southampton salon and held: “Connors is acting as a figurehead or straw man for [West Coast’s principals] to mask their ownership or control of the Southampton salon.” In granting the injunction against West Coast Tan’s owners, the court pointed out that the purpose of restrictive covenants “is to protect against the use of capital in a competing business as well as the skill and expertise of the individual in question.” The court also enjoined Connors, even though he had never signed an agreement with Tantopia, holding: “It is well-established that a non-covenantor who benefits from the covenantor’s relationship with a competing business must abide by the same restrictive covenant agreed to by the covenantor.” Click here to see the entire case.